Firms' financial performance and corporate board diversity : evidence from Kenya

Abstract

Boards’ affects performance through their monitoring and advising functions. The ability to perform these functions depends on among other things, the experience of the board. This paper examines the effects of corporate board experience on firms’ financial performance of listed companies in the Nairobi Securities Exchange for the period 2001-2010 using System GMM. Performance variables are ROA, Tobin’s Q ratio, share price and price to book value. Experience is measured as stock of initial experience and tenure in a particular board. Tenure is found to be positively and significantly associated with the performance variables. Tenure ^2 captures the entrenchment behavior of the board. This entrenchment effect has a significantly negative effect on performance. This negative effect eventually outweighs the positive tenure effect and gives rise to the downward effect of tenure on performance hence the inverted U-relationship between tenure and performance. The study reports an optimal tenure of between 7 and 8 years depending on the performance variable being considered. At shorter tenure; there is a positive effect on performance, but at a longer tenure, entrenchment behavior of the veteran board members outweighs the monitoring effect. In fact these long tenured boards become ‘zombie boards’, thus negatively affecting performance. Stock of initial experience consists of education, and past managerial experience. It has a significant positive relationship with performance.